January 26, 2015
Subsidizing Savings v. Subsidizing Borrowings
Posted by Christine Hurt

OK, so I try not to just vote my interest.  If I'm in tax bracket A, I try not to root for tax cuts to A and cheer for tax hikes for tax bracket B and so forth.  I know it's human to vote one's interest, but I try to vote the interest of the country.  (Ha!)

BUT, I have to say I hate this new proposal.  Currently 529 programs allow anyone to save money for future education benefits for any named beneficiary, with all returns on investment growing tax-free.  Distributions for educational purposes are tax-free as well.  There are no phase-outs or maximum income rules for using 529s.  Well, the White House proposes that this end.  Any future deposits into a 529 will be subject to taxation on returns upon distribution.

Aargh. Here, voting for this proposal is in my own interest, but I also think it's a bad policy.  Yes, I am in the 529 generation.  We had our first child in 1999, about the same time as details were being hammered out in early versions of the 529 that would become part of what is now known as "the Bush Tax Cuts" in 2001.  We have relied heavily on the 529 vehicle for all our kids, and I would be very upset personally if this tax benefit would disappear (going forward).  And no, I doubt we would continue to use the 529 vehicle for that purpose if earnings were taxed on distribution given the educational limit on use.  Now, we are taking the risk that one or more of our children will somehow get scholarship dollars for all their education and be unable to use all of their funds for educational use.  

I also do not believe that it is a rationalization to say this proposal is bad.  The optics are bad; the result is bad.  If you ask anyone in higher education what the biggest problem today is, the answer would have to be student debt.  So, why would you want to suddenly discourage earmarked savings for higher education?  If we are concerned about the cost of education, then maybe we should quit using federal money to subsidize student debt, not quit using federal money to subsidize student savings.

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